Advice to CEOs from Other CEOs

Tag Archives: Contingency

Situation: A CEO’s company is short of cash to make a scheduled payment against a line of credit. They have been notified that if the payment isn’t made, the bank will transfer cash from the company’s checking account to satisfy the payment. This would compromise their ability to meet payroll and pay vendors. How are your relations with your bank?

Advice from the CEOs:

What the company needs is time, so that they can pay down the line of credit from cash flow. It is best to compartmentalize any discomfort with this situation. Remember that any bank action generally takes time.

Advice from the company’s lawyer is that if they stop making deposits, the bank will notice and react negatively. Given that the current interest rate on the line is low, a negative reaction from the bank could lead to an increase in the rate.

The company has a bargaining chip. The bank does not want to show the company’s line as delinquent. If they admit that a delinquency exists, it puts them in a bad place.

Develop a contingency plan to guard against the company’s biggest risk – inability to make payroll. Assure that this can be covered.

Use checks paid by customers to move a portion of company assets to another bank.

Secure a new line of credit with another bank to cover credit needs, including salary coverage if the current bank acts adversely.

Assure that any conversations with the bank are documented in letters to the company’s contact at the bank.

Situation: A company was created from IP originally developed by the founder at a large corporation that was not interested in commercializing it. The new company has now become successful and visible, with the large corporation as an important partner. The CEO wants to make sure that she has all bases covered to secure the future of the new company. How do you manage a key partner relationship?

Advice from the CEOs:

There must be clear agreement between the company and partner on ownership of the original IP – a legal document signed by both parties. You can bet that should a conflict arise, the lawyers representing the larger company will argue that their client owns the IP. Once this is secured, focus on developing and licensing software that you clearly own.

Develop contingency plans should the key partner decide to exit the business on which your relationship is based. Identify what other companies could replace lost revenue. Start to build these relationships.

If the partner helps to fund current development, take the money that you save and develop your own IP, independent of the partner relationship. As an alternative, at least develop critical components of the software as your own IP, without using the partner’s funding.

This will free you to develop other customer segments to broaden your business base.

What concerns does the partner have? Strategically, large corporations can be uncomfortable if they feel dependent upon a much smaller company. There are two things that you do:

Makes a concerted effort to assure that you are essential to the large corporation’s overall business.

Make change as painful as possible.

How would you get paid if the large partner exited the relationship?

Negotiate a contract with a 2-year window to any change that partner wants to make. This will provide you with the room to develop new clientele should the partner exit.

Have contingency plans to rebuild capabilities that might be lost and sell it to other clients.

Customize your software by client. In the process, you will develop new methods to keep your edge over competitors.

Keep critical parts of your processes “manual” so that they are essentially trade secrets and not easily replicable if the partner were to try to take over the IP.

Situation: A company faces a difficult situation. One of their customers placed a substantial order for custom product a year ago. They have taken delivery of some product but the bulk of the order is still in the company’s warehouse. The company negotiated a cancellation fee with the customer, but they haven’t paid. What is the best option for the company? How do you deal with a deadbeat customer?

Advice from the CEOs:

Because the customer is unresponsive, be ready to take legal action. Get an attorney. The initial process to prepare for a suit may cost $5,000-7,000. Therefore be prepared to sue for damages plus legal fees, with the threat that liens will be put on the customer’s business during the settlement process.

Once everything is ready for a suit, talk to the customer – the message is either they pay in full what they owe or you’re ready to file a suit which will cost them much more.

The Uniform Commercial Code may cover you for custom product. Check this out. This is important so that the company won’t be exposed to a countersuit for filing a frivolous suit.

A route which may be less expensive is to hire a lawyer on a contingency basis. Contingency lawyers may want up to 40% of the settlement or judgement to take a case, and the value of the case has to be large enough to attract their attention.

Situation: A company is in the midst of due diligence for sale of the company. Chances of closing the deal are 50/50. The CEO, key staff and the Board must plan for both contingencies. How have you planned for contingencies whether a sale goes through or not?

Advice from the CEOs:

You have to assume that the company will be a going concern. If there’s no hope for the future, there’s no power in the present. Without hope, you can’t establish a motivating vision around which to rally the team. Whether or not the sale goes through:

It is essential that the owners and Board make a commitment to the key employees, if not to the long term business.

Absent a long term commitment to the business, customer initiatives and alliances may prove difficult, because major customers will know that an offer is on the table. They want to be sure that they can count on you for ongoing needs.

The Board and Leadership Team must create a strategy for moving forward.

Key to success will be material and financial commitments from the Board to motivate the Leadership Team to stay on-board.

Retention plans may include:

Sizeable retention bonuses to the team.

If an employee stock-ownership program is in the works, there must be assurance that this will be put into place.

Rules of engagement in the case of future due diligences that will preserve the financial interests of the team.

For the CEO, support of the Board is crucial. It is imperative that the CEO impress on the Board how critical their support is to both the company and their own financial and fiduciary interests. If the Board fails to make commitment to the team and company moving forward, it will be difficult to create a winning strategy.

Situation: Local and world events continually remind us that both nature and events are unpredictable. At any time we may have to deal with emergencies including water, fire, earthquakes, and the possibility that we or our employees may not be able to get to or communicate with our offices for a period. It is prudent for all of us to have plans in place that will enable us to deal with emergencies. What are best practices for emergency preparedness?

Advice from the CEOs:

You must have an extensive business continuity plan. This includes:

An outline of potential situations that you may face in your locations, potential losses associated with these situations, and plans for responding to each.

Redundant remote data back-up.

Manufacturing continuity planning.

Personnel contingencies.

Alternate vendor and service arrangements.

Drafting a full emergency plan takes time and work. However, it is essential. Start simply:

Look at the obvious risks in your locations.

For each, develop your back up or continuity strategy and start to put it in place.

Let the list of contingencies grow with time as you recognize more risks.

Start this exercise NOW.

Once you have a plan, drill the plan. Make sure that your people know what to do in each case so that if something happens they are prepared. It is amazing how this can build the confidence of your employees that they will be able to handle emergency situations.

Situation: The Company wants to be prepared in case of emergencies including water, fire, earthquake, and the possibility that owners or employees may have difficulty communicating or traveling to their offices for an extended period. What have others done to create an emergency response plan?

Advice of the CEOs:

One company developed a disaster recovery plan, including:

A communication plan.

Employees taking notebook computers home in the evening.

Data back-up and server restoration capabilities.

The plan was relatively easy to build and is summarized in a 4-page document in the possession of each employee.

What have others done to address emergency preparedness?

Daily systems back-ups.

If you use a web-based CRM, check whether they have a disaster recovery program.

Assuring that there are sufficient cash reserves to manage through 30 days with no invoicing or collections.

Drafting a full emergency plan is essential. Start simply:

Look at the obvious risks in your location.

For each that you identify, develop a back up or contingency strategy and put it in place.

Let the list of contingencies grow over time as you recognize more risks.

Start this exercise NOW.

Once you have a plan, drill the plan. Make sure that employees know what to do in a variety of emergencies so that they are prepared.

This can build the confidence that your employees will be able to handle emergencies.